External Reserve Bank members not favoured in study

Finance Minister Bill English. Photo / Richard Robinson

Most western central banks do not entrust interest rate decisions to committees with external members - the model favoured by the Green and Labour Parties - a Reserve Bank study found.

The February 2013 report, elicited by the Greens under the Official Information Act, compared the Reserve Bank's decision-making and accountability arrangements with those of 13 other central banks including the US Federal Reserve, the European Central Bank, the Reserve Bank of Australia and the Bank of England.

Only one other, the Bank of Canada, has its governor as the sole decision-maker making the final call on policy rate decision; the rest all vest that power in a committee.

Of the 12 committees making interest rate decisions, five include external members from outside the central banks themselves: Australia, Israel, Korea, Norway and Britain. In the UK five of the nine members of the monetary policy committee are drawn from the Bank of England; in the other four the external members are a majority.

Greens co-leader Russel Norman has a member's bill in the parliamentary hopper which would make the Reserve Bank's board of directors responsible for setting the official cash rate, and also require the publication of the board's minutes.

"The board can represent the whole economy better than, I think, the governor can. The governors, particularly in the past, have had a very strong focus on inflation and have tended to err on the side of a higher OCR, whereas a Reserve Bank board which has the export sector in particular represented on it won't have such a singular focus," he said.

"There is a strong argument for having people there from the real economy. With New Zealand's chronic current account deficit we do need to give particular attention to the tradeables sector and its interests do need to be well represented, I believe."

The Reserve Bank paper notes that the Treasury, in advising Finance Minister Bill English ahead of concluding his policy targets agreement (PTA) with governor Graeme Wheeler last year, suggested a review of the sole decision-maker model "but not as a matter of urgency".

In March Wheeler further formalised the collegial nature of its policy-making process by announcing the formation of a "governing committee" - made up of himself, deputy governors Grant Spencer and Geoff Bascand, and assistant governor and chief economist John McDermott - which would discuss all major policy decisions, including those on monetary policy, foreign exchange intervention and prudential policy. The governor has a veto.

The report noted the board's duties include assessing the governor's performance against the requirements of the PTA.

It can recommend his or her removal if it is satisfied the bank or governor are not adequately performing their functions.

Norman accepts that if the board became the decision-making body that part of the accountability and governance structure would be lost.

"But the PTA is an agreement between Finance Minister and the Reserve Bank governor and that accountability can equally come from the Government side as the Reserve Bank side," he said.